There are two rules when it comes to buying “takeover targets”. Rule one: buy undervalued companies that are good investments in their own right, regardless of takeover. Rule two: never forget rule one.
Sharply higher global merger and acquisition activity- and a spike in domestic M&A activity - has newspapers speculating on the next targets. Expedia’s recent takeover bid for Wotif.com Holdings, foreshadowed in this column, has prompted talk of a wave of other takeovers in the technology sector as global players seek scale.
That might happen. But chasing fully or mostly overvalued tech stocks higher, in the hope of takeover, is risky. A better strategy is starting with undervalued stocks that have strategic appeal for corporate predators, and can still provide good returns in the absence of takeover.